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Top 5 High ROE Stocks to Buy as Fed Tapering Looms Large

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The U.S. equity markets continued to witness intense volatility over the past few days due to fiscal uncertainty, rising commodity prices, and high inflationary pressures. Concerns over the debt ceiling, which was temporarily raised to cover the federal expenses till early December, remain a potent challenge for the Congress. The stock market rally was also perhaps fueled by the mixed quarterly performance by hitherto reported companies despite some solid results by the technology sector. With the Fed’s tapering decision looming next week, a broader view of the future economic growth is likely to be revealed.   

As investors employ a wait-and-see approach in a classic example of “backing and filling” in the market, they can benefit from ‘cash cow’ stocks that garner higher returns. However, identifying cash-rich stocks alone does not make for a solid investment proposition unless it is backed by attractive efficiency ratios like return on equity (ROE). A high ROE ensures that the company is reinvesting cash at a high rate of return.

Why ROE?

ROE = Net Income/Shareholders’ Equity

ROE helps investors distinguish profit-generating companies from profit burners and is useful in determining the financial health of a company. In other words, this financial metric enables investors to identify companies that diligently deploy cash for higher returns.

Moreover, ROE is often used to compare the profitability of a company with other firms in the industry — the higher, the better. It measures how well a company is multiplying its profits without investing new equity capital and portrays management’s efficiency in rewarding shareholders with attractive risk-adjusted returns.

Screening Parameters

In order to shortlist stocks that are cash-rich with high ROE, we have added Cash Flow greater than $1 billion and ROE greater than X-Industry as our primary screening parameters. In addition, we have taken a few other criteria into consideration to arrive at a winning strategy.

Price/Cash Flow lesser than X-Industry: This metric measures how much investors pay for $1 of free cash flow. A lower ratio indicates that investors need to pay less for a better cash flow-generating stock.

Return on Assets (ROA) greater than X-Industry: This metric determines how much profit a company earns for every dollar of asset, which includes cash, accounts receivable, property, equipment, inventory and furniture. The higher the ROA, the better it is for the company.

5-Year EPS Historical Growth greater than X-Industry: This criterion indicates that continued earnings momentum has translated into solid cash strength.   

Zacks Rank less than or equal to 2: Zacks Rank #1 (Strong Buy) or 2 (Buy) stocks are known to outperform irrespective of the market environment.

Here are five of the 22 stocks that qualified the screen:

Seagate Technology Holdings PLC (STX - Free Report) : Headquartered in Dublin, Ireland, Seagate is the second-largest manufacturer of hard disk drives in the United States. This Zacks #2 Ranked company has a long-term earnings growth expectation of 1.2%. The company delivered a trailing four-quarter earnings surprise of 11.3%, on average.

Best Buy Co., Inc. (BBY - Free Report) : Headquartered in Richfield, MN, Best Buy is a multinational specialty retailer of consumer electronics, home office products, entertainment software, communication, food preparation, wellness, health, security, appliances, and related services. The company operates in the United States and Canada. The company delivered a trailing four-quarter earnings surprise of 31.9%, on average. This Zacks #2 Ranked company has a long-term earnings growth expectation of 7.6%.

Celanese Corporation (CE - Free Report) : Texas-based Celanese is a global hybrid chemical firm that produces chemical substances and materials. The company manufactures high-performance engineered polymers that are used in a range of high-value applications. It also produces acetyl products for most major industries. The company delivered a trailing four-quarter earnings surprise of 12.7%, on average. The Zacks Rank #1 company has a long-term earnings growth expectation of 27.7%. You can see the complete list of today’s Zacks #1 Rank stocks here.

CBRE Group, Inc. (CBRE - Free Report) : Headquartered in Dallas, TX, CBRE is a commercial real estate services and investment firm, offering a wide range of services to tenants, owners, lenders, and investors in office, retail, industrial, multi-family, and other types of commercial real estates in all major metropolitan areas across the globe. With more than 100,000 employees, the company serves clients in above 100 countries. This Zacks #2 Ranked company has a long-term earnings growth expectation of 11%. The company delivered a trailing four-quarter earnings surprise of 53.5%, on average.

Regeneron Pharmaceuticals, Inc. (REGN - Free Report) : Tarrytown, NY-based Regeneron is a biotechnology company focused on the discovery, development, and commercialization of treatments targeting serious medical conditions. The company delivered a trailing four-quarter earnings surprise of 18.7%, on average. This Zacks Rank #1 stock has a long-term earnings growth expectation of 8.5%.

You can get the rest of the stocks on this list by signing up now for your 2-week free trial to the Research Wizard and start using this screen in your own trading. Further, you can also create your own strategies and test them first before taking the investment plunge.  

The Research Wizard is a great place to begin. It's easy to use. Everything is in plain language. And it's very intuitive. Start your Research Wizard trial today. And the next time you read an economic report, open up the Research Wizard, plug your finds in, and see what gems come out.

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Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.

Disclosure: Performance information for Zacks’ portfolios and strategies are available at: https://www.zacks.com/performance.